SWEDEN - The Organisation for Economic Cooperation and Development (OECD) has suggested Sweden should consider linking the state retirement age to life expectancy.

In its latest economic review of Sweden, the OECD noted projections by the Swedish government suggest pension expenditure will be "broadly stable as a share of GDP until 2040", at which point the costs will fall as a result of the pension reforms in the late 1990s.

However, the report said through the use of the "universal guarantee pension, the government retains the risk that retirement income from the new income pension system is inadequate".

The OECD also warned projections from the European Commission covering pensions, education, labour market measures, health and long-term care "are more pessimistic than the government's", although it admitted these figures also show Swedish public finances "face a smaller demographic challenge than in many other European countries".

The report suggested increasing costs of social and welfare benefits would need to be met either through higher taxes or pre-funding - where funds are accumulated now to pay for expected costs in the future.

This type of measure is already used by Sweden in the income pension system - with the AP buffer funds - but the OECD warned for other areas of public expenditure "pre-funding might create the perception that the government has excess resources in the short-term, creating incentives for additional public spending and reducing incentives to address spending growth. This would exacerbate the fiscal problem pre-funding was designed to help alleviate".

However, the OECD report admitted: "This "expenditure creep" may not be a major problem in Sweden's case since the fiscal surpluses are being applied to reducing gross debt and accumulating assets in the income pension system, which has clear rules for how and when the assets can be used."

But the organisation suggested "increasing the statutory retirement age may reduce expenditure on the basic pension and generate additional tax revenue".

It argued increasing the average retirement age would "reduce the longevity risk borne by the government in the income pension system (the risk that the income pension system will not deliver "sufficiently" high retirement income due to longer life)".

The report pointed out Finland, Germany, and Portugal have all linked pension benefit levels to life expectancy, while Denmark - which has a "much larger problem with early retirement than Sweden" - has decided to index the retirement age to life expectancy from 2024.

Findings from the report showed the Swedish income pension system "already entails some incentives to extend working life, since additional years of work raise the replacement rate in retirement", while pensioners can also access part of their savings while still working to ease the transition from work to retirement.

But the OECD added research from the Swedish Fiscal Policy Council "estimates that gains from increasing the retirement age could be enough to permanently reduce the budget surplus by around 1% of GDP".

As a result, one of the OECD's recommendations to Sweden on its fiscal policy is "consideration should be given to formally linking the retirement age to life expectancy".

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